David Gonski urges communication in fallout of Westfield

Su-Lin Tan

A roadmap for engagement between institutional investors and the companies in which they own stakes would be valuable, says chief executive of the Governance Institute of Australia Tim Sheehy.

Businessman David Gonski reinforced the need for companies to communicate with their large institutional investors because how they vote can no longer be ignored.

Mr Gonski and business leaders including Caltex Australia’s chairman Elizabeth Bryan on Monday agreed at a luncheon held by the Governance Institute of Australiathat voting at general meetings should be the final outcome of a robust engagement between large investors and listed companies.

“I believe very strongly that the days of the board operating in the quiet corridors, closed-up boardrooms are gone,” Mr Gonski said. “Today, it is absolutely imperative that we recognise that there are stakeholders and that we talk to them. We may not always agree, but they may give us some understanding.”

The Governance Institute on Monday released a new set of corporate governance guidelines, targeted not at companies but at their institutional investors.

The institute and international governance adviser Sandy Easterbrook found the means of engagement between listed companies and their institutional investors are no longer just executive briefings.

Companies failing to manage all communication channels with varied material stakeholders could mean major investors potentially voting against them.

“Boards should not be hearing on the eve of an EGM that a major restructure will be gunned down. And investors should not be finding out at the meeting that there’s been a ‘material change’ to a proposal they’ve been asked to vote upon,” the Institute said.

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The guidelines recommend major institutional investors publicly disclose how they vote, who makes voting decisions and what factors are considered.

They also emphasise the use of technology to facilitate communication, and the importance of establishing a regular engagement program. Companies and institutional investors are encouraged to clarify who is responsible to talk to investors about key issues.

The guidelines focus on institutional investors, in part so that retail investors can gain a better understanding of key matters through their engagement. .

AMP Capital head of ESG research Dr Ian Woods said the lawsuit against Newcrest Mining for selectively providing sensitive information could have been avoided if the guidelines were in practice today.

“It is very disappointing when companies cannot talk to their shareholders, because that’s how the market should work. Shareholders are interested in the long term value of the company especially things that do not have an impact on the share price immediately,” he said.

Mr Gonski emphasised the shareholders who are interested in the long-term view are often the large asset owners such as superannuation funds, who hold a lot of voting power.

Ms Bryan said: “Investors are receptive to long-term planning. In fact, they are worried when boards look only at the short term view.”

Driving this new set of guidelines also was the recent public conflict between Westfield Retail Trust and its investors, who initially voted down a $70 billion merger restructure proposed by Westfield Group.

The greatest opposition came from institutional investors UniSuper and Colonial First State, who were concerned with higher debt levels in the new merged company.

“The recent Westfield case is a warning for what can happen when listed entities fail to engage with their institutional investors and so do not understand who holds the voting decisions,” Mr Sheehy said.

“Good engagement is about building relationships of trust over time so that investors are more likely to keep faith with the board even in difficult times.”

Ms Bryan and Mr Gonski cautioned that even with increased engagement, trust must still be placed with boards to make decisions that will benefit companies, not just shareholders.

“There is a duty for directors to be able to stand up to the sharp edge, that it is in the interest of the company to go in a certain direction,” Ms Bryan said.

Mr Gonski also said in keeping up communications with investors, overseas investors must not be ignored.

These guidelines complement the current Australian Stock Exchange corporate governance requirements under its listing rules, which focus on disclosures of roles, responsibilities, capabilities and remuneration of their boards.

Mr Sheehy said the new guidelines would avoid the compliance trap if there was buy-in from companies.